The new revenue guidance under ASC 606 introduces “transfer of control” to determine when to recognize revenue for completed work. Transfer of control essentially occurs when the work becomes the customer’s to own and have use of. Depending on the contract, it can happen either at a single point in time or over time. To calculate how much revenue they’ve earned for a billing period, the contractor might choose a method such as cost-to-cost or estimated percent to complete.

• Schedule a demo to see how HubiFi can help you implement these best practices and learn more about our pricing.
• As project needs would likely fluctuate, contractors would have a difficult time adjusting their cash flow management without real-time financial information.
• For a deeper dive into data-driven decisions, consider scheduling a free data consultation with HubiFi.
• This type of clear, accurate financial reporting helps businesses present their financials to ownership in a synced and seamless way.
• While construction is a classic example, several other industries benefit from this method.
• Under the five-step model, this requires contractors first to identify the performance obligations in the contract and allocate a transaction price to each one.

Accurate Revenue Recognition

Conversely, this method should not be used when there are significant uncertainties about the percentage of completion or the remaining costs to be incurred. The core principle of the percentage of completion method is recognizing revenue as you earn it, not just when the project finishes. This differs from other methods that might delay revenue recognition until the very end, potentially misrepresenting your financial performance during long-term projects. With POC, revenue gets distributed across the project’s timeline, providing a more accurate view of your income stream.

A guide to the percentage of completion method for contractors

And if you’re ready to take the stress out of construction accounting, consider partnering with Construction Cost Accounting for accurate, hassle-free bookkeeping services. Making sure contract amounts and estimates are accurate on the work in progress report ensures income is reported correctly and avoids penalties for overbillings. If the percentage of completion method amount billed to date is less than the revenue that is recognized by the percentage of completion method, that’s called underbilling. That amount is recorded as an asset, as more money is due than has been billed. Waiting until the end of a project makes the accounting easier but means that a contractor’s income will seem unsteady and irregular, since projects end at different times.

• Firstly, it ensures accurate revenue recognition by reflecting earned revenue proportionate to the project’s completion status.
• Real-time adjustments ensure that revenue recognition reflects the actual project status.
• The percentage of completion (POC) method offers a solution, allowing businesses to recognize revenue as a project progresses rather than waiting until it’s fully completed.
• Remote project teams and finance departments benefit from cloud-based platforms that centralize information and support real-time updates.
• Instead of recognizing all revenue at project completion, you recognize it incrementally as you progress.

POC = (Costs incurred to date / total estimated costs) * 100

• While healthy cash flow is crucial for any business, the percentage of completion method doesn’t directly depend on it for revenue recognition.
• Failure to comply with these standards can lead to misleading financial statements, negatively impacting investor trust and decision-making processes.
• An accurate EAC requires careful consideration of current costs, potential future costs, and any anticipated changes in project scope.
• Through detailed examples, we have illustrated how these steps work in practice.

For more insights into managing percentage of completion accounting, take a look at this helpful article from Windham Brannon. Consistent reviews and revisions of cost estimates are vital for maintaining accuracy, as highlighted by Procore’s discussion on the percentage of completion method. ASC 606 offers specific guidance, especially for businesses using the percentage of completion method. For example, if a construction company builds a bridge and installs lighting on that same bridge under one contract, the same percentage of completion measure should apply to both tasks.

Progress billing is best used (and often required) on long-term projects spanning two or more years. Payments can be divided into multiple installments (typically monthly) for each project phase. This can help contractors maintain a steady cash flow while recognizing the completion of each phase of the project.

The POC method offers several advantages that make it a preferred choice for revenue recognition in long-term projects. The POC method to recognizing revenue considers the revenue and expenses of long-term projects compared to the amount of work completed as the project progresses. POC is essential in the construction industry, as waiting years to recognize revenue may defy Generally Accepted Accounting Principles (GAAP) and lead to more confusion and potential for errors.

Industries and Projects Best Suited for This Method

The percentage of completion method is one of the most common methods of accounting used in construction. In this article, we’ll explain the percentage of completion method, how it works, and look at some real-life examples. Many accounting software packages and project management tools can simplify calculations and assets = liabilities + equity reporting. Look for software that integrates project management and accounting functions, automates revenue recognition calculations, and offers robust reporting features.

As projects evolve, maintaining clarity and precision in financial reporting becomes even more critical. Once you’ve got your POC, you can then use this percentage to calculate the amount of revenue to recognize for a given payment period or milestone. The method you choose to calculate the percentage of completion should be based on the nature of the contract and the terms of the delivery obligation.

If you’re looking for ways to streamline your financial operations, consider scheduling a demo with HubiFi to see how our automated solutions can help. The most common is costs incurred to date, but they can also use units completed or labour hours. Integrating your project management tools with your accounting software is a game-changer. Accurate cost and completion estimates are the foundation of the percentage of completion method. This integration ensures that all project data is current and accurately reflected in your financial reports.